Solar microinverter manufacturer SolarEdge Technologies (SEDG 0.20%) reported a new record for sales in a single quarter Monday evening, sending its stock higher at first -- but not all the news was great. Sales surged 62% in the first quarter of fiscal 2022 when compared to Q1 2021. And yet, the deeper you dig into this earnings report, the worse the news gets -- and this probably explains why the stock couldn't hold onto its gains this week.
Take "earnings," for example. SolarEdge boasted that in tandem with big sales gains, "non-GAAP net diluted EPS" grew 22% in comparison with last year, to $1.20 per share. But when calculated according to generally accepted accounting principles (GAAP), SolarEdge's earnings were much weaker than that -- just half non-GAAP earnings in fact, or $0.60 per share. And granted, that was better than last year, but it was still only a 9% improvement over last year's Q1.
That's a whole lot less profit than you'd probably expect a company to earn after reporting "record" sales and a 62% surge in revenue.
So what's up with SolarEdge's profits this quarter, and why might investors who initially bought this stock, have turned around and sold it just days later? In a conference call with analysts, SolarEdge CEO Zvi Lando tried to explain the disconnect. For a seasonally slow quarter, according to Lando, SolarEdge saw an unusually "significant increase in demand" in Q1, in part due to "current dynamics in Europe," i.e., the threat of losing access to Russian oil and gas, and Europeans' need to seek alternative energy sources to compensate.
To meet this demand, SolarEdge had to ship more product by air, which hurt profit margins. Additionally, SolarEdge ran into problems with "electronic component availability," the widely publicized disruption in supply chains that has been afflicting so many other companies of late.
Between high transport costs and inflation driving up the cost of components, SolarEdge's costs surged even faster than its sales, rising 79% year over year. And in a curious move, CFO Ronen Faier confirmed that "we're trying not to pass to customers all of those, I would call it, expenses."
In other words, costs rose...and SolarEdge decided to eat those costs rather than raise prices!
SolarEdge confirms that this not only hurt profits in Q1, but will hurt profit margins in Q2, and perhaps even longer. Lando confirmed further that SolarEdge cannot know when supply shortages will improve. I suspect that the selling we saw at SolarEdge toward the end of this week was prompted by this realization. The stock costs 84.5 times earnings, after all -- not cheap -- and investors may not like the idea of earnings continuing to drag.
Because the longer they do, the more expensive this stock is going to look.